WORLD ACCEPTANCE CORP annual report, FY2020

World Acceptance Corporation Form 10-K Summary

Reporting period: Fiscal year ended March 31, 2020. Although the request references 2019 Q4, this filing is the annual report for fiscal 2020 and includes comparative fiscal 2019 and 2018 results.

Business Context

World Acceptance Corporation is a consumer finance company offering small- and medium-sized installment loans, credit insurance, automobile club memberships, tax preparation, and tax advance loans to customers with limited access to traditional credit. At March 31, 2020, it operated 1,243 branches in 16 U.S. states and had 3,744 employees. Gross loans generally ranged from $100 to $20,600, with an average gross loan balance of approximately $1,321.

Mexico operations were sold effective July 1, 2018 and are presented as discontinued operations. The company operates a single reportable segment.

Financial Performance and Key Metrics

Metric	Fiscal 2020	Fiscal 2019	Change
Total revenue	$590.0 million	$544.5 million	8.4% increase
Interest and fee income	$508.3 million	$469.2 million	8.3% increase
Provision for loan losses	$181.7 million	$148.4 million	22.4% increase
General and administrative expense	$347.5 million	$288.3 million	20.5% increase
Interest expense	$25.9 million	$17.9 million	44.4% increase
Income from continuing operations	$28.2 million	$73.9 million	61.9% decrease
Net income	$28.2 million	$37.2 million	24.4% decrease
Diluted EPS from continuing operations	$3.54	$8.03	56.0% decrease
Operating income as a percentage of revenue	10.3%	19.8%	Down 9.5 points

Net income from continuing operations was reduced by a $21.7 million accrual related to the SEC investigation of former Mexico operations and by materially higher credit-loss expense. Fiscal 2019 also included a $39.0 million impairment loss associated with the Mexico exit and a $36.7 million loss from discontinued operations.

Loans, Credit Quality and Margins

Gross loans receivable increased to $1.210 billion from $1.128 billion, a 7.3% increase.
Net loans receivable increased to $804.4 million from $755.6 million, a 6.5% increase.
Average net loans receivable increased 12.6% to $928.4 million.
The allowance for loan losses increased to $96.5 million from $81.5 million, equal to 10.7% of net loans before the allowance versus 9.7% in the prior year.
Net charge-offs rose to 18.0% of average net loans from 16.1%; accounts at least 91 days past due on a recency basis rose to 4.2% of the portfolio from 3.8%.
Contractual delinquency of at least 61 days increased to 8.7% of gross loans from 7.8%; recency-basis delinquency increased to 6.5% from 5.8%.
Provision for loan losses represented 30.8% of revenue versus 27.3% in fiscal 2019. General and administrative expense represented 58.9% of revenue versus 52.9%.
New borrowers, the company’s highest-risk customer category, represented 17% of the year-end portfolio, compared with 13.7% in the prior year.

Cash Flow, Debt and Liquidity

Net cash provided by operating activities was $257.4 million, compared with $244.7 million in fiscal 2019.
Investing activities used $256.0 million, primarily for loan growth, acquisitions, intangible assets, and capital expenditures.
Cash and cash equivalents were $11.6 million at March 31, 2020, compared with $9.3 million at March 31, 2019.
Total debt was $451.1 million, compared with $251.9 million, and shareholders’ equity was $412.0 million, compared with $552.1 million. The debt-to-equity ratio was approximately 1.1 to 1.
The revolving credit facility had commitments of $685.0 million, $451.1 million outstanding, and $180.2 million of borrowing availability at March 31, 2020, subject to borrowing-base limitations and covenants. Management reported compliance with the covenants.
As of May 15, 2020, available borrowing capacity was $320.5 million. The facility matures June 7, 2022 and bears interest at LIBOR plus an applicable margin, subject to a minimum rate of 4.0%.
A 1% change in LIBOR would affect annual interest expense by approximately $4.5 million based on the March 31, 2020 debt balance.
The company repurchased approximately $197.4 million of common stock during fiscal 2020 and had $22.6 million of remaining repurchase authorization at March 31, 2020. It has not paid cash dividends since 1989.

Material Changes Versus the Prior Period

Revenue and loan balances grew, supported by branch expansion, acquisitions, and higher average earning loans.
Profitability deteriorated substantially because credit losses, personnel costs, other expenses, and interest expense grew faster than revenue.
The company opened 19 branches, acquired 38 branches, and merged or consolidated seven branches, resulting in 50 net additional branches.
General and administrative expense increased partly because of higher personnel and share-based compensation, occupancy costs, amortization, and a $21.7 million Mexico investigation accrual.
Fiscal 2020 included a $251,000 impairment loss related to the former corporate headquarters, which was classified as held for sale.
The company adopted the new lease accounting standard, recording a $101.7 million right-of-use asset and a $102.8 million lease liability at March 31, 2020; the adoption did not affect operating results.
Fiscal 2020 results were revised after the May 7, 2020 earnings release to correct the accounting for historic tax credits. The revision reduced annual net income by approximately $2.5 million and diluted EPS by $0.32, resulting in revised net income of $28.2 million and diluted EPS of $3.54.

Guidance, Outlook and Management Commentary

Management planned to open or acquire approximately 25 branches during fiscal 2021, subject to regulatory approvals, financing, attractive locations, and qualified personnel.
COVID-19 reduced loan demand as marketing was halted, customer mobility declined, and unemployment increased. The company updated underwriting criteria, reduced branch hours, offered payment deferrals, waived the normal 30-day wait for unemployment insurance claims, and accelerated digital lending initiatives.
Nearly all branches remained open because they were classified as essential businesses. Online and telephone activity for account access, payments, and refinancings increased.
Management stated that it believed available liquidity was sufficient to support fundamental operations during the pandemic, but could not estimate the longer-term effects. Sustained adverse conditions could impair compliance with minimum capital ratios and revolving-credit requirements.
The company adopted the current expected credit loss standard on April 1, 2020. It estimated an initial increase of approximately $14.5 million to $26.2 million in the allowance for credit losses, with a corresponding reduction to retained earnings, net of tax. The estimate was preliminary at filing.

Risks, Contingencies and Unusual Items

COVID-19: Economic contraction, unemployment, lower demand, payment deferrals, and higher charge-offs could materially affect earnings, liquidity, and covenant compliance.
Mexico investigation: The company is cooperating with SEC and DOJ investigations concerning potential FCPA and other legal violations at the former Mexico operations. It accrued $21.7 million for probable SEC-related losses, but no DOJ settlement had been reached and the ultimate cost could be higher.
Indemnification: Under the Mexico sale agreement, the company may have to indemnify purchasers for certain investigation-related claims and liabilities.
Regulatory exposure: State rate caps, licensing requirements, CFPB rulemaking, consumer-protection requirements, and possible federal limits such as a 36% annualized rate cap could materially restrict or eliminate the company’s current lending model.
Credit risk: The company serves non-prime borrowers, generally does not rely on perfected collateral interests, and faces elevated loss risk from unemployment and economic deterioration.
Leverage and covenant risk: Substantially all assets secure the revolving facility, which restricts debt, acquisitions, repurchases, dividends, investments, and other activities. A covenant breach could permit acceleration and termination of unused commitments.
Accounting estimates: The allowance for loan losses, CECL adoption, tax positions, legal accruals, goodwill, and share-based compensation involve significant management judgment.

Most Important Facts for Investors to Verify

Whether COVID-19 produces sustained increases in delinquency, charge-offs, payment deferrals, and CECL-related provisions after March 31, 2020.
The final resolution, timing, and total cost of the SEC and DOJ Mexico investigations, including any indemnification claims.
Actual borrowing-base availability and compliance with fixed-charge, net-worth, leverage, and collateral-performance covenants.
The final impact of CECL on the allowance for credit losses, retained earnings, regulatory capital, and future earnings volatility.
Whether the company can maintain loan growth and branch expansion while controlling credit losses and operating expenses.
Potential state or federal regulatory changes affecting interest rates, fees, loan underwriting, refinancing, collections, and CFPB supervision.
The sustainability of share repurchases given increased leverage, reduced equity, COVID-19 uncertainty, and the company’s absence of cash dividends.
The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified audit opinion from RSM US LLP.